AEB 3103 Principles of Food and Resource Economics
Module 5: Price
controls, quotas, and taxes
Remember the invisible hand theorem: “Spontaneous market players
making self-interested decisions will collectively achieve the most
efficient allocation of resources.”
- Corollary 1 to the theorem: When government tries to “micro-manage”
a well-functioning market using their visible hands, it
often make things worse.
How can government intervene market transactions?
- Price controls
- The price of gas cannot be higher than $3/gallon
- The price received for corn cannot be lower than $5/bushel
- The monthly rent of thou apartment shalt not increase by more than
1.5% per year
- Price of essential goods and services should not grossly exceed the
average price within the last 30 days
- The minimum hourly wage shall not be below $7.25
- Quotas
- The number of taxi medallions in New York shall not exceed
13,587
- The area of new residential development land shall not exceed 1,000
acres next year
- Household median income: $38,000 (2020)
- Average rent for a two-bedroom apartment: $16,800 + utilities
- What is the implied housing burden?
How do we thinking about the current housing crisis?
- Housing affordability: does that lower the cost of housing on
average?
- Housing equity: do low-income people actually get the
rent-stabilized units?
- Housing quality: are the apartments actually livable?
- Free of cockroach, trash piling, and broken dish washers
- Moveability: how difficult is it to find housing?
How does Gainesville rank in the above three categories (with a scale
of 1-10)
Different ways of rent stablization
One quick way of fixing this problem: rent control - limiting the
amount of rent that the landlord can charge the tenants.
- If we just limit how much the landlord can charge people, that will
surely solve the problem!
- 7 States have rent-control laws (with MA discussing). 37 states
explicitly bans rent control laws
“Landlords cannot be allowed to raise rents to whatever they want,
whenever they want. We need national rent control.” — Bernie Sanders
“Rent control is one of many tools that local jurisdictions can use
to promote access to affordable housing.” — Pete Buttigieg
“It’s time that we stop commodifying the housing market because it is
not a speculative investment, it is a basic right for all Americans.” —
Alexandria Ocasio-Cortez
Discuss with your peers:
If Gainesville enacted a rent control policy starting of today,
within the next 10 years what will happen to:
- Housing affordability
- Housing equity
- Housing quality
- Housing moveability
The Economics of Rent Control
The simpler version
But rent control also have other problems:
What will landlords do with the property if they are only receiving
$500/month for an apartment with a market rent of $1200?
- If the toilet/ceiling is leaking?
- If the dishwasher is 30 years old?
- If there is cockroach everywhere?
Why isn’t the landlord afraid of the tenants moving out/write bad
reviews?
Rent-stabilization makes it harder to find housing
- The waitlist for rent-stablized apartments is sometimes decades
long, because:
- On average, renters spend more time looking for housing
- Under rent control, people usually get apartments through luck or
personal connections.
Can low-income households actually get those rent-stabilized
apartments?
- Price controls leads to misallocation of apartments: people who
badly need a place to live may not find one, but some apartments may be
occupied by people with much less urgent needs.
Rent Stablization creates black markets (and corruption)
- A black market is a market in which goods or services are bought and
sold illegally—either because they are prohibited or because the
equilibrium price is illegal.
- Some tenants are willing to bribe landlords.
- Black markets encourage disrespect for the law in general and
worsens the position of those who are honest.
- Black markets can diminish some of the inefficiencies, but in the
end, society as a whole is made worse.
And other types of problems

Amending rent controls: do these work?
- Inflation-adjusted rates: rent increases with CPI + X% (7% in
Oregon, 2% in Boston)
- New unit exemption: newly-built units are usually exempt from rent
control for at least 5 years
- Luxury exemption: if monthly rent is above a certain threshold, it
is off the rent stabilization list.
- Means testing: before moving into a rent-stabilized
unit, the government verifies if the tenant satisfies a certain income
requirement
In-class exercise:
Suppose that the demand curve for taxi rides is P = 10 - 2Q. The
supply curve for taxi rides is P = 0.5Q.
- If the government imposes a price ceiling of $4, what is the
deadweight loss in this case?
- If the government imposes a price ceiling of $1, what is the
deadweight loss in this case?
So why price controls?
- They do benefit some people (who are typically better organized and
more vocal than those who are harmed by them).
- If the price ceiling has been in effect for a long time, buyers may
not have a realistic idea of what would happen without it.
- Government officials often do not understand supply and demand
analysis.
An extreme example
- Venezuela sets price controls for food, oil, housing, etc.
- When oil prices were high, President Chavez was able to subsidize
price ceiling through imports
- When oil price collapse, shortage started
- Long lines in front of stores, hunger, hyperinflation on the black
market
- Maduro announced in 2014 that due to the shortage of steel,
abandoned cars and other vehicles would be acquired by the government
and melted to provide rebar for housing.
- In April 2014, Maduro ruled by decree that Venezuelans who owned
three or more rental properties would be forced by the government to
sell their rental units at a set price or they would face fines or have
their property possessed by the government.
- By 2016, residents of government-provided housing, who were usually
supporters of the government, began protesting due to the lack of
utilities and food.
Price Floors
Sometimes governments intervene to push market prices up instead of
down.
- Price support for agricultural products
- Minimum wage
That creates a surplus: too much production, too
little demand
Problems with price floors
- Encouraging waste.
- To deal with the surplus generated by dairy price floors, the U.S.
government sometimes buys back the excess and donates or destroys
it.
- Misallocate sales, keeps high-cost firms and discourages low-cost
firms
- Regulated US airlines business prevents low-cost airlines from
entering
- Insufficiently high quality
Graphing price floors
Quotas
- Government dictates a fixed amount of quantity for a particular good
- Often in the form of permits
- Transferable quota: those permits can be bought and sold on a market
place
- Example: The number of taxi medallions in New York shall not exceed
13,587
Let’s first think about the non-transferable case
If the city of New York issues a fixed amount (that is fewer than an
open-market equilibrium) of non-transferable permits:
- What does that say about the profitability of driving a cab?
- Who will eventually get the permit?
- At what “price”?
- Who will be drive the cabs?
New York’s Medallion Market
- Transferable via sale/auction
- Individual operators + medallion-holding companies
- Lease off medallions to cab drivers for a fee
- Medallion mortgage/finance
This means that medallion is an asset that generate
economic rents
- Just like stock, housing, or any other assets
Scarcity rent
- Price signal reflects the scarcity of the underlying asset
- Scarcity rent is the difference between production cost and the
market price
- Capping the number of permit creates economic scarcity
- i.e. A Taylor Swift concert ticket is priced way above cost of
renting the stadium, etc.
- The amount of scarcity rent reflects the underlying scarcity
What can we say about quotas from the graph
- Quotas create deadweight loss, decrease social welfare
- Price of the underlying asset reflects the scarcity of the regulated
good
- Non-transferable quota create allocational inefficiency